America, the Odd Man Out

At long last, a good portion of mainstream economists now concede that a 'double
dip' recession is in the cards for the United States. To head off the pain,
sixteen top economists addressed an open letter to the President urging him
to "stimulate" the economy with a massive new round of government spending.
We feel this is a recipe for driving a recession into a depression. However,
there can be few doubts that such a move is being considered in the highest
policy circles. Flush from victories in financial regulation and healthcare,
the Administration may feel the conditions are ripe to push through another
bold initiative.

If so, the United States may find itself in a very diminishing bloc of nations
who fail to appreciate the magnitude of the global debt crisis. Its policies
will become increasingly at odds with the drift of other world powers. Given
American dependence on economic support from abroad, the risks of such isolation
are significant.

On July 20th, UK Prime Minister David Cameron made his first official visit
to the US. At a joint press conference that followed the private meeting, President
Obama and Mr. Cameron papered over the fundamental economic disagreements that
separate both governments.

At his core, Mr. Obama is in favor of spending his way out of the current
recession. Most of the post-World War II occupants of the White House have
followed the same course. Although the policy is short-sighted, it serves nevertheless
to protect the competitive advantage of keeping the US dollar at the heart
of the international monetary system. Spending expands global credit and creates
the illusion of an invincible dollar, increasing the system's popularity at
home and abroad. In a self-perpetuating feedback mechanism, the dollar's unique
international position allows it to get away with even more spending.

Many international economists, bankers, and politicians now believe the US
has overplayed its hand. At the recent G-20 meetings, America was at odds with
the other major powers, who favored major cuts in government spending even
if the result was a deeper short-term recession.

Part of this can be explained by currency movements. The Greek debt crisis
threw doubt on even financially sound nations like Germany and ravaged the
European common currency. Wishing to save the euro from the dustbin of history,
the Germans and their allies within the EU have dug in. The sentiment even
had an effect on the UK elections, which put the Conservatives into power with
a mandate to strengthen the government's balance sheet and buck up the pound
sterling.

On the other hand, Washington's profligacy has yet done little to dent confidence
in the greenback. As a result, the Obama Administration senses no need for
caution. This hubris will prove costly.

On paper, the United States appears to be the world's richest economy. However,
she is also the largest debtor. If unfunded obligations are added to the $14.1
trillion official Treasury debt, the total would exceed $60 trillion, or 430%
of 2009 GDP. If deficits and the disguised costs of Obamacare are included,
the bill gets even larger. Despite this, the US government retains its treasured
'AAA' credit rating, at least in the eyes of disgraced Western ratings agencies.
Meanwhile, according to the seemingly less-biased Dagong International Credit
Rating (DICR) agency of China, the US has been downgraded to 'AA-'. Given its
debt levels, even that rating may be overly generous.

According to the DICR, only Australia, Denmark, Luxembourg, Norway, New Zealand,
and Switzerland retain their prized 'AAA' rating. Canada, China, Germany, and
the Netherlands have been downgraded to 'AA+'. France, Japan, South Korea,
and the UK join the US at the disturbing 'AA-'level. However, if Prime Minister
Cameron delivers on his promised 25 per cent cut in government spending by
2015, the UK may regain a higher rating.

On the other hand, President Obama has bragged that Americans should "make
no mistake, we are headed in the right direction." More disturbingly, his Administration
has put forward the absurd notion that government spending achieves a 3:1 multiplier
versus private spending (meaning every dollar of government spending will "pay
for itself" by generating three dollars of private economic activity). Sensible
economists suspect that the reverse is true: every dollar of government spending
sucks between one and three dollars from the wealth-creating private sector.

It appears that America is now set on the sanguine 'progressive' path of stimulus
and inflation. Our rejection of the other great powers' newfound maturity will
push our recession into a depression, reduce our credit rating, and raise our
already vast borrowing costs. Meanwhile, the rest of the world may not even
notice we've fallen. Cool heads should plan accordingly.

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John Browne is the Senior Economic Consultant for Euro Pacific
Capital, Inc. Mr. Brown is a distinguished former member of Britain's Parliament
who served on the Treasury Select Committee, as Chairman of the Conservative
Small Business Committee, and as a close associate of then-Prime Minister Margaret
Thatcher. Among his many notable assignments, John served as a principal advisor
to Mrs. Thatcher's government on issues related to the Soviet Union, and was
the first to convince Thatcher of the growing stature of then Agriculture Minister
Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously
pronounced that Gorbachev was a man the West "could do business with." A graduate
of the Royal Military Academy Sandhurst, Britain's version of West Point and
retired British army major, John served as a pilot, parachutist, and communications
specialist in the elite Grenadiers of the Royal Guard.

In addition to careers in British politics and the military,
John has a significant background, spanning some 37 years, in finance and business.
After graduating from the Harvard Business School, John joined the New York
firm of Morgan Stanley & Co as an investment banker. He has also worked
with such firms as Barclays Bank and Citigroup. During his career he has served
on the boards of numerous banks and international corporations, with a special
interest in venture capital. He is a frequent guest on CNBC's Kudlow & Co.
and the former editor of NewsMax Media's Financial Intelligence Report and
Moneynews.com. He holds FINRA series 7 & 63 licenses.